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Industry raises doubts over Labour's PFI plans

Construction and business leaders have questioned shadow chancellor John McDonnell’s proposal to scrap private finance initiatives and take all current PFI contracts “in-house” if it was to win the next election.

Mr McDonnell announced plans to “rip up” PFI and take current projects “in-house” as part of his keynote speech at the Labour Party Conference in Brighton on Monday.

According to analysis of all current PFI projects by the Treasury, there were 716 separate PFI schemes worth a combined £59.4bn as of March 2016.

The Department of Health had the largest number of PFI projects by capital value, at £12.93bn, followed by the Ministry of Defence with £9.52bn, the Department for Education on £8.59bn and the Department for Transport with £7.84bn.

Under Mr McDonnell’s plans, all current PFI contracts would be reviewed and wound up if deemed necessary. Labour has also committed to not signing any more PFI deals and to develop alternative public sector models for funding infrastructure.

However, the plans have been questioned by experts who called for clarity on how the proposals would be funded.

Infrastructure expert and Pinsent Masons partner Jonathan Hart said: “Given stated objectives of bringing contracts ‘back in house’, nearly all PFI contracts contain specific provisions to deal with early termination of contracts and payment of financial compensation in such circumstances.

“Employment law and other regulatory aspects of such changes would also be hugely complicated and require extensive (re)negotiations.

“Like it or not, PFI and its variants have delivered a range of social and economic infrastructure for the UK which probably would not exist, but for the engagement of project finance solutions.”

Speaking on Radio 4 earlier in the day, Mr McDonnell also proposed nationalising construction along with water, rail and energy as part of new proposals. However he did not mention this idea directly in his speech and it is understood Labour’s team denied plans for nationalisation.

Liz Jenkins, partner at law firm Clyde & Co, said the policy on PFI contracts, although possible, would bring with it a “significant” rise in finance costs.

Ms Jenkins said: “Taken literally – ‘bringing back PFI contracts’ would involve the termination of over 700 individual schemes across a number of diverse sectors, with very significant compensation being paid to funders and investors in each case.

“There is no doubt that PFI is in need of a face-lift but other measures should be considered before renationalisation.”

In a wide-ranging speech, Mr McDonnell singled out a number of industries including energy and rail that would be brought back into public ownership and also gave support to the proposed Swansea Bay Tidal Lagoon.

On the topic of PFI, Mr McDonnell said: “Jeremy Corbyn has made it clear that, under his leadership, never again will this waste of taxpayer money be used to subsidise the profits of shareholders, often based in offshore tax havens.

“The government could intervene immediately to ensure companies in tax havens can’t own shares in PFI companies, and their profits aren’t hidden from HMRC.

“We’ll put an end to this scandal and reduce the cost to the taxpayers. How? We have already pledged that there will be no new PFI deals signed by us. But we will go further. I can tell you today, it’s what you’ve been calling for.

“We’ll bring existing PFI contracts back in-house.”

Commenting on energy, the shadow chancellor said he would launch a new government-backed energy company “working with the co-operative sector on a scale never seen before in this country”.

Taking a swipe at the government’s plans for infrastructure investment in the North, McDonnell added that Labour would invest in a swathe of schemes in northern regions including extending HS2 into Scotland.

“We’ll build Crossrail for the North, and we will extend HS2 into Scotland and invest in the whole of the country.

“We will deliver the funding for the Midlands Connect, we will overturn decades of neglect in the South-west and we will electrify the rail lines all the way through from Cornwall to London once and for all.”

The Confederation of British Industry (CBI) warned that the proposals for a dramatic state intervention in to the economy would lead to inward investors “running for the hills”.

CBI director-general Carolyn Fairburn said: “The shadow chancellor’s vision of massive state intervention is the wrong plan at the wrong time. It raises a warning flag over the British economy at a critical time for our country’s future.

“Business and politicians share a determination to create a fairer society in which everyone benefits.

“But the trickle of stalled investments caused by Brexit uncertainty could become a flood if these plans were to become reality. This would threaten the living standards of the very people that need help, from pensioners to students.

“Forced nationalisation of large parts of British industry will send investors running for the hills, and puts misplaced nostalgia ahead of progressive vision.

Given that PFI remains the love child of the New Labour era and the rather neglected awkward teen of the coalition and Tory governments, the announcements from shadow chancellor John McDonnell in Brighton should not be seen as surprising.

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